What is a drilling and well services company worth?

In a drilling and well services company the rig can be a large part of what is being bought, so equipment value deserves as much attention as earnings. The company can also earn in two quite different ways: drilling projects and pump and well maintenance for existing well owners. A buyer can value the rig, the project pipeline and the service book separately, then ask how much of each survives a change of owner. Two companies with similar revenue can therefore be worth different amounts. This page explains what a buyer looks at, in what order, and what pulls the number down. It gives no price, because none can be given without seeing the rig.

The rig is a reference point

A useful first question is what the rig and its support equipment would fetch if the business stopped tomorrow, since that gives a reference point for the price. Ask about the rig’s age, remaining working life, depth capability, maintenance records and whether it suits the region’s geology. A buyer can commission an independent equipment appraisal instead of accepting the seller’s number.

Book value is not market value

The seller’s tax records will show a figure for the rig, and it need not match what the rig is worth. The Canada Revenue Agency explains that a business cannot deduct the full cost of depreciable property in the year it acquires it; the cost is written off over time as capital cost allowance, and the agency sorts depreciable property into classes with their own rates. When assets are sold, the CRA adds, the seller may have a recapture or a terminal loss of that allowance. A rig written down heavily but still working well may sell above its tax value; whether that produces a CCA recapture is a question for the seller’s accountant. The buyer prices the machine on the market; the seller’s accountant works out what the result means for tax.

What the rest of the price pays for

Beyond the equipment, a buyer can ask what earnings the rig can be counted on to produce. Two things are worth asking about. One is the relationships behind larger water-supply projects with agricultural operators and developers, and whether the work is repeat or referred rather than one-off. The other is the maintenance book: existing well owners who call when a pump fails, and whether it also leads to the next drilling project. Ask for revenue split between projects and service work.

Recasting the earnings

A buyer may rebuild the profit figure to show what the company would earn under a new owner. If the owner runs the rig, ask what a market wage for a driller doing that work would cost before counting any profit, and which personal costs run through the company could be identified as add-backs. Adjustments also run the other way. Earnings struck before depreciation flatter a company whose rig will one day need replacing, so it is worth asking what allowance for that cost belongs in the figure. Deferred maintenance deserves the same question, since an owner who skimped on servicing can show a better year than the rig can sustain. If project revenue arrives unevenly, it can help to look at several years rather than the latest one. BDC notes that a business valuator can give an owner a realistic picture of what the business is worth.

What gets discounted

Points that may lower the price, and that a seller can address before listing, include:

• A single ageing rig with no replacement plan or maintenance records; BDC notes that an owner will not get full value for a business if the equipment is not maintained.
• Licences or certifications for well work that may not be current; ask the seller which ones the work needs in each province it operates in, and check their status.
• Any obligation the company has to plug or decommission wells, if it is not disclosed or provided for; ask the seller in writing.
• Dependence on one or two large developer or agricultural clients, the pattern the glossary describes as customer concentration, which BDC also names as a reason an owner will not get full value.
• Dependence on the owner or on one certified technician, which is a form of key-person risk.

Which valuation method fits

BDC describes earnings-based methods as commonly used for businesses that generate reasonable profits and whose value is greater than that of their net assets alone, and asset-based methods as typically used for businesses whose value is asset-related rather than operations-related, so ask which describes the company in front of you. A company with modest earnings and a good rig may be worth more than its earnings suggest, because the equipment has its own value. A company with strong earnings and a worn-out rig may be worth less, because the buyer must fund the replacement. Any multiple quoted in conversation is not an appraisal of a particular company. How the agreed price is divided between the rig, other equipment, inventory and goodwill also matters. The CRA notes that a sales agreement may set a price for each asset, a value for the inventory and an amount attributed to goodwill, and each side’s accountant can advise on what the split means for tax.